Highlights of the Bill

The Pension Fund Regulatory and Development Authority Bill, 2005 establishes an authority to develop and regulate the new pension system (NPS) which seeks to provide old age income security for all individuals, including those in the unorganised sector.

NPS will be implemented through a combination of retailers, pension funds and recordkeeper(s).

Every subscriber will have an individual pension account, which will be portable across job changes. The subscriber will choose the fund managers and schemes to manage his pension wealth. He also has the option of switching schemes and funds.

The NPS has already been operationalised for new central government employees through a notification. This is a ‘defined contribution’ scheme unlike the ‘defined benefit’ scheme for existing central government employees.

Key Issues and Analysis

The Bill provides a structure to the private and unorganised sectors to plan for old age income security. It is not compulsory for these sectors to take part in this system. Those not participating may still have to fall back on public resources in old age.

In the system for new government employees, the investment risk is entirely borne by the employee. However, he is no longer exposed to the risk of default by the government.

There will be no explicit or implicit guarantee on the pension wealth unless through purchase of market based guarantees. This is unlike the case of bank deposits where deposits up to Rs 1 lakh are guaranteed.

Any unfavourable event affecting market prices at the time of retirement could lower both pension wealth and the annuity rate. Subscribers may have to stay on in the system beyond their retirement date in order to ride over such a shock.

PRS estimates that given current market rates for annuity, Rs 1,000 per month subscribed to NPS for 35 years will result in lifetime annual pension for self of Rs 47,000 to Rs 77,000 under different scenarios of returns.